Ex 4-16

a jobb processc jobd processe jobf processg jobh jobi processj processk jobl job

m processn jobo jobp jobq jobr jobs jobt processu job

Ex 4-17

$ budget 2014 actual 2014DM 2,000,000 1,900,000DL 1,500,000 1,450,000mftg OH 2,700,000 2,755,000

1. OH allocation rates 2014

budgeted 1.80 OH budget 2,700,000DL budget 1,500,000

actual 1.90 OH actual 2,755,000DL actual 1,450,000

2. job 626actual normal

DM 40,000 40,000DL 30,000 30,000

mftg OH 57,000 54,000 = 1,9 x DL = 1,8 x DL127,000 124,000

3. actual vs normaltotal OH allocated in 2014 $ 2,610,000 = 1,450,000 (actual DL) x 1,80 (budget OH allocation rate)

OH actual cost in 2014 $ 2,755,000

OH under-allocated $ 145,000

4. Managers at Destin Products might prefer to use normal costing because it enables them to use the budgeted manufacturing overhead rate determined at the beginning of the year to estimate the cost of a job as soon as the job is completed. Managers want to know job costs for ongoing uses, including pricing jobs, monitoring and managing costs, evaluating the success of the job, learning about what did and did not work, bidding on new jobs, and preparing interim financial statements. Under actual costing, managers would only determine the cost of a job at the end of the year when they know actual manufacturing overhead costs.

Ex 4-18

budget 2014 actual 2014OH - $ 8,000,000 7,614,000DL - h 160,000 162,000OH - $/hDL 50.0 47.0

Laguna Missionconstruction period Feb-Jun 2014 May-Oct 2014DM 106,650 127,970DL 36,276 41,750DL - hours 920 1,040

1. OH allocation rates 2011

budgeted rate 50.0 budget OH + budget DL hours

actual rate 47.0 actual OH + actual DL hours

2. jobs Laguna, Mission

normal costing Laguna MissionDM 106,650 127,970DL 36,276 41,750mftg OH 46,000 52,000 = 50$/DLh x DLhtotal 188,926 221,720

actual costing Laguna MissionDM 106,650 127,970DL 36,276 41,750mftg OH 43,240 48,880 = 47$/DLh x DLhtotal 186,166 218,600

3

Normal costing enables Anderson to report a job cost as soon as the job is completed, assuming that both the direct materials and direct labor costs are known at the time of use. Once the 920 direct labor-hours are known for the Laguna Model (June 2014), Anderson can compute the $188,926 cost figure using normal costing. Anderson can use this information to manage the costs of the Laguna Model job as well as to bid on similar jobs later in the year. In contrast, Anderson has to wait until the December 2014 year-end to compute the $186,166 cost of the Laguna Model using actual costing. Although not required, the following overview diagram summarizes Anderson Construction’s job-costing system.

Ex 4-22

1.Q1 Q2 Q3 Q4 FY

DL hours/unit 1 1 1 1DL hours /month 565 490 245 100 1,400mftg OH /month 12,250 12,250 12,250 12,250 49,000mftg OH $/DL h 21.7 25.0 50.0 122.5 35.0

Q1 Q2 Q3 Q4 FYunits 565 490 245 100 1,400DM - $14/unit 7,910 6,860 3,430 1,400 19,600DL - $20/DLh x 1DLh 11,300 9,800 4,900 2,000 28,000mftg OH -Var - $15/DLh x 1DLh 8,475 7,350 3,675 1,500 21,000mftg OH -fixed 12,250 12,250 12,250 12,250 49,000total cost 39,935 36,260 24,255 17,150 117,600unit cost 70.68 74.00 99.00 171.50 84.00

2.Q1 Q2 Q3 Q4 FY

units 565 490 245 100 1,400DM - $14/unit 7,910 6,860 3,430 1,400 19,600DL - $20/DLh x 1DLh 11,300 9,800 4,900 2,000 28,000mftg OH -Var - $15/DLh x 1DLh 8,475 7,350 3,675 1,500 21,000mftg OH -fixed 19,775 17,150 8,575 3,500 49,000total cost 47,460 41,160 20,580 8,400 117,600unit cost 84.00 84.00 84.00 84.00 84.00

3.selling price Q1 91.9 96.2 128.7 223.0selling price Q2 109.2 109.2 109.2 109.2

Ex 4-32

1.

2. direct cost per hour (DL) 65.00 97,500 cost/head

$/DLh 1,500 hours/head

3.indirect cost per DL hour 55.00 2,475,000 ind cost

$/DLh 45,000 hours 1500h x 30 heads

4. Richardson PunchDL hours 120 160Dir costs (@65$/DLh) 7,800 10,400Ind costs (@55$/DLh) 6,600 8,800

14,400 19,200

Ex 4-33

1.dir cost / hour (partners) 140.00 210,000 cost/head

1,500 hours/head

dir cost / hour (associates) 50.00 75,000 cost/head1,500 hours/head

2. gen support secret supporttotal cost 2,025,000 450,000total working hours 45,000 - 30heads x 1500hpartners working hours - 7,500 5heads x 1500h

45.00 60.00 $/h

3. Richardson Punchdir cost partners 6,720 4,480

48h x 140$/h 32h x 140$/hdir cost associates 3,600 6,400

72h x 50$/h 128h x 50$/hind cost gen supp 5,400 7,200

120h x 45$/h 160h x 45$/hind cost secret supp 2,880 1,920

48h x 60$/h 32h x 60$/htotal cost 18,600 20,000

4. Richardson Punchex 4-32, Single direct – Single indirect 14,400 19,200ex 4-33, Multiple direct – Multiple indirect 18,600 20,000

40% part; 60% assoc 25% part; 75% assoc

5

The Richardson and Punch jobs differ in their use of resources. The Richardson job has a mix of 40% partners and 60% associates, while Punch has a mix of 20% partners and 80% associates. Thus, the Richardson job is a relatively high user of the more costly partner-related resources (both direct partner costs and indirect partner secretarial support). The Punch job, on the other hand, has a mix of partner and associate-related hours (1:4) that is only slightly higher than the mix of partner and associate hours for the firm as a whole (1:5). The refined-costing system in Problem 4-33 increases the reported cost in Problem 4-32 for the Richardson job by 29.17% (from $14,400 to $18,600) and the Punch job by a much smaller 4.17% (from $19,200 to $20,000).

I would recommend that Kidman & Associates use the job costing system in this problem with two direct- and two indirect- cost categories. Kidman & Associates should use multiple categories of direct costs (partner labor and professional labor) because the costs of the different categories of labor are very different and different jobs use these direct labor resources in different proportions. The system with only one direct cost would be accurate only if all jobs used partner-labor and professional-labor in the same proportion, which is clearly not the case. Using a single direct-cost category would undercost (overcost) jobs that have a high (low) proportion of partner-labor. Kidman should use multiple indirect cost pools because partners use additional secretarial support resources that professionals do not use. With a single indirect cost pool as in problem 4-32, jobs that use proportionately greater (fewer) partner labor-hours are not assigned the extra (lower) costs of supporting these partners and are undercosted (overcosted). The job costing system in this problem more accurately represents the costs incurred on different jobs and therefore helps managers make better decisions.

Ex 5-17Total heat tests stress tests

mftg OH total 1,190,000test hours 70,000 40,000 30,000mftg OH - $/h 17.00

mftg OH - 4 categories $DL (traced) 146,000 100,000 46,000Equipment (# test-hours) 350,000 5.00 $/test-hourSetup (# setup-hours) 430,000 13.600 h 3.600 h 25.00 $/setup-hourDesign tests (time required) 264,000 3.000 h 1.400 h 60.00 $/hour

1,190,000

1.output unit level DL 146k

Equip 350k

batch level Setup 430k

service sustaining Design 264k

2.

total cost heat tests stress tests TotalDL 100,000 46,000 146,000Equip 5$ / test-hour 200,000 150,000 350,000Setup 25$ / setup-hour 340,000 90,000 430,000Design 60$ / h 180,000 84,000 264,000Total 820,000 370,000 1,190,000

cost / test hour heat tests stress tests avgDL 2.50 1.53 2.09Equip 5.00 5.00 5.00Setup 8.50 3.00 6.14Design 4.50 2.80 3.77Total 20.50 12.33 17.00index vs avg 121 73

3.

At a cost per test-hour of $17, the simple costing system undercosts heat testing ($20.50) and overcosts stress testing ($12.33). The reason is that heat testing uses direct labor, setup, and design resources per hour more intensively than stress testing. Heat tests are more complex, take longer to set up, and are more difficult to design. The simple costing system assumes that testing costs per hour are the same for heat testing and stress testing.

The ABC system better captures the resources needed for heat testing and stress testing because it identifies all the various activities undertaken when performing the tests and recognizes the levels of the cost hierarchy at which costs vary. Hence, the ABC system generates more accurate product costs. Vineyard’s management can use the information from the ABC system to make better pricing and product mix decisions. For example, it might decide to increase the prices charged for the more costly heat testing and consider reducing prices on the less costly stress testing. Vineyard should watch if competitors are underbidding Vineyard in stress testing and causing it to lose business. Vineyard can also use ABC information to reduce costs by eliminating processes and activities that do not add value, identifying and evaluating new methods to do testing that reduce the activities needed to do the tests, reducing the costs of doing various activities, and planning and managing activities.

Ex 5-25

1 simple costing system

Baked Milk & Frozen TotalGoods Fruit Juice Products

$ $ $ $Revenues 59,500 66,000 51,000 176,500

CostsCost of goods sold 36,000 48,000 34,000 118,000Store support (30% of COGS) 10,800 14,400 10,200 35,400Total costs 46,800 62,400 44,200 153,400

Operating income 12,700 3,600 6,800 23,100Operating income as % revenues 21.34% 5.45% 13.33% 13.09%

Activity costs are based on the following:Baked Milk & FrozenGoods Fruit Juice Products

Ordering $102 per purchase order 25 20 15Delivery $78 per delivery 90 35 30Shelf-stocking $21 per hour 190 180 40Customer support $0.22 per item sold 13,500 17,500 8,000

2 ABC system

Baked Milk & Frozen TotalGoods Fruit Juice Products

$ $ $ $Revenues 59,500 66,000 51,000 176,500

CostsCost of goods sold 36,000 48,000 34,000 118,000Ordering ($102 × 25; 20; 15) 2,550 2,040 1,530 6,120Delivery ($78 × 90; 35; 30) 7,020 2,730 2,340 12,090Shelf-stocking ($21 × 190; 180; 40) 3,990 3,780 840 8,610Customer support 2,970 3,850 1,760 8,580($0.22 × 13,500; 17,500; 8,000)Total costs 52,530 60,400 40,470 153,400

Operating income 6,970 5,600 10,530 23,100Operating income as % revenues 11.71% 8.48% 20.65% 13.09%

2 The rankings of products in terms of relative profitability are:

ABC System

1. Baked goods 21.3% 11.7%2. Frozen products 12.50 13.3% 8.5%3. Milk & fruit juice 3.02 5.5% 20.6%

The percentage revenue, COGS, and activity costs for each product line are:

Baked Milk & Frozen TotalGoods Fruit Juice Products

Revenues 33.7% 37.4% 28.9% 100.0%Cost of goods sold 30.5% 40.7% 28.8% 100.0%Ordering ($102 × 25; 20; 15) 41.7% 33.3% 25.0% 100.0%Delivery ($78 × 90; 35; 30) 58.1% 22.6% 19.4% 100.0%Shelf-stocking ($21 × 190; 180; 40) 46.3% 43.9% 9.8% 100.0%Customer support 34.6% 44.9% 20.5% 100.0%

Simple Costing System

The baked goods line drops sizably in profitability when ABC is used. Although it constitutes 30.5% of COGS, it uses a higher percentage of total resources in each activity area, especially the high-cost delivery activity area. In contrast, frozen products draw a much lower percentage of total resources used in each activity area than its percentage of total COGS. Hence, under ABC, frozen products are much more profitable. Henderson Supermarkets may want to explore ways to increase sales of frozen products. It may also want to explore price increases on baked goods.

Ex 5-26

11 2 3 4 Total

Gross sales 50,000 30,000 100,000 70,000 250,000Sales returns 10,000 5,000 7,000 6,000 28,000

Net sales 40,000 25,000 93,000 64,000 222,000Cost of goods sold (80%) 32,000 20,000 74,400 51,200 177,600

Gross margin 8,000 5,000 18,600 12,800 44,400Customer-related costs:Regular orders ($20 × 40, 150, 50, 70) 800 3,000 1,000 1,400 6,200Rush orders ($100 x 10, 50, 10, 30) 1,000 5,000 1,000 3,000 10,000Returned items ($10 × 100, 26, 60, 40) 1,000 260 600 400 2,260Catalogs and customer support 1,000 1,000 1,000 1,000 4,000Customer related costs 3,800 9,260 3,600 5,800 22,460

Contribution (loss) margin 4,200 -4,260 15,000 7,000 21,940Contribution (loss) margin as %GS 8.40% -14.20% 15.00% 10.00% 8.78%

The analysis indicates that customers’ profitability (loss) contribution varies widely from (14.2%) to 15.0%. Immediate attention to Chain 2 is required which is currently showing a loss contribution. The chain has a disproportionate number of both regular orders and rush orders. Ramirez should work with the management of Chain 2 to find ways to reduce the number of orders while maintaining or increasing the sales volume. If this is not possible, Ramirez should consider dropping Chain 2 if it can save the customer-related costs. Chain 1 has a disproportionate number of the items returned as well as sale returns. The causes of these should be investigated so that the profitability contribution of Chain 1 could be improved.

Ex 5-30Total C SE

dir costs $80 / hgeneral support (criteria: prof lab hours) 25,000 $100 / hlabour hours 250 150 100

2. C SE Total

DL @ 80$/h 12,000 8,000 20,000ind costs @ 100$/h 15,000 10,000 25,000Total 27,000 18,000 45,000

Ex 5-31

1 Indirect costs = $10,000Total professional labor-hours = 250 hours (150 hours on Campa + 100 hours on St. Edith’s Glass)Indirect cost allocated per professional labor-hour (revised) = $10,000 ÷ 250 = $40 per hour

2 C SE TotalDirect costs:Direct professional labor $80 × 150; $80 × 100 12,000 8,000 20,000Research support labor 1,800 3,850 5,650Computer time 400 1,600 2,000Travel and allowances 700 4,200 4,900Telephones/faxes 250 1,200 1,450Photocopying 300 700 1,000Total direct costs 15,450 19,550 35,000

Indirect costs allocated $40 × 150; $40 × 100 6,000 4,000 10,000

Total costs to be billed 21,450 23,550 45,000

3 C SE Totalexercise 5-30 27,000 18,000 45,000Single direct cost/ Single indirect cost poolexercise 5-31 21,450 23,550 45,000Multiple direct costs/ Single indirect cost pool

The Problem 5-31 approach directly traces $15,000 of general support costs to the individual jobs. In Problem 5-30, these costs are allocated on the basis of direct professional labor-hours. The averaging assumption implicit in the Problem 5-30 approach appears incorrect—for example, the St. Edith’s Glass job has travel costs six times higher than the Campa Coal case despite having lower direct professional labor-hours.

Ex 5-32

1 C SE TotalDirect costs:Direct professional labor

partner $100 × 50; $100 x 75 5,000 7,500 12,500associates $60 × 100; $60 x 25 6,000 1,500 7,500

Research support labor 1,800 3,850 5,650Computer time 400 1,600 2,000Travel and allowances 700 4,200 4,900Telephones/faxes 250 1,200 1,450Photocopying 300 700 1,000Total direct costs 14,450 20,550 35,000

Indirect costs allocated:Indirect costs for partners $48 × 50, 75 2,400 3,600 6,000Indirect costs for associates $32 × 100, 25 3,200 800 4,000Total indirect costs 5,600 4,400 10,000

Total costs to be billed 20,050 24,950 45,000

C SE TotalSingle direct cost/ Single indirect cost pool exercise 5-30 27,000 18,000 45,000Multiple direct costs/ Single indirect cost pool exercise 5-31 21,450 23,550 45,000Multiple direct costs/Multiple indirect cost pools exercise 5-32 20,050 24,950 45,000

The Campa and St. Edith’s cases differ in how they use “resource areas” of Bradley Associates:

partner $100 × 50; $100 x 75 40.0% 60.0%associates $60 × 100; $60 x 25 80.0% 20.0%Research support labor 31.9% 68.1%Computer time 20.0% 80.0%Travel and allowances 14.3% 85.7%Telephones/faxes 17.2% 82.8%Photocopying 30.0% 70.0%

The higher the percentage of costs directly traced to each case, and the greater the number of homogeneous indirect cost pools linked to the cost drivers of indirect costs, the more accurate the product cost of each individual case.

The Campa Coal case makes relatively low use of the higher-cost partners but relatively higher use of the lower-cost associates than does St. Edith’s Glass. As a result, it also uses less of the higher indirect costs required to support partners compared to associates. The Campa Coal case also makes relatively lower use of the support labor, computer time, travel, phones/faxes, and photocopying resource areas than does the St. Edith’s Glass case.

Ex 5-35alloc basis

administration #proceduresmaintenance capital cost (depreciation)sanitation total cleaning minutesutilities total procedure minutes

xrays ultrasound ct scan mri totaltechnician labour 62,000 101,000 155,000 103,000 421,000depreciation 42,240 256,000 424,960 876,800 1,600,000materials 22,600 16,400 23,600 31,500 94,100administration 20,000maintenance 250,000sanitation 252,500utilities 151,100total cost 126,840 373,400 603,560 1,011,300 2,788,700# procedures 3,842 4,352 2,924 2,482 13,600minutes to clean 5 5 15 35minutes procedure 5 15 25 40

minutes to clean total 19,210 21,760 43,860 86,870 171,700minutes procedure total 19,210 65,280 73,100 99,280 256,870

xrays ultrasound ct scan mri totaltechnician labour 62,000 101,000 155,000 103,000 421,000depreciation 42,240 256,000 424,960 876,800 1,600,000materials 22,600 16,400 23,600 31,500 94,100administration 2,945 4,798 7,363 4,893 20,000dir technician labour hours 14.7% 24.0% 36.8% 24.5% 100%sanitation 36,817 59,976 92,043 61,164 250,000dir technician labour hours 14.7% 24.0% 36.8% 24.5% 100%total cost 37,185 60,576 92,963 61,776 252,500dir technician labour hours 14.7% 24.0% 36.8% 24.5% 100%minutes to clean 22,252 36,250 55,631 36,967 151,100dir technician labour hours 14.7% 24.0% 36.8% 24.5% 100%total cost 226,040 535,000 851,560 1,176,100 2,788,700cost per service 58.8 122.9 291.2 473.9 205.1

xrays ultrasound ct scan mri totaltechnician labour 62,000 101,000 155,000 103,000 421,000depreciation 42,240 256,000 424,960 876,800 1,600,000materials 22,600 16,400 23,600 31,500 94,100administration 5,650 6,400 4,300 3,650 20,000#procedures 28.2% 32.0% 21.5% 18.3% 100%maintenance 6,600 40,000 66,400 137,000 250,000depreciation 2.6% 16.0% 26.6% 54.8% 100%sanitation 28,250 32,000 64,500 127,750 252,500total cleaning minutes 11.2% 12.7% 25.5% 50.6% 100%utilities 11,300 38,400 43,000 58,400 151,100total procedure minutes 7.5% 25.4% 28.5% 38.6% 100%total cost 178,640 490,200 781,760 1,338,100 2,788,700cost per service 46.5 112.6 267.4 539.1 205.1

3. Using the disaggregated activity-based costing data, managers can see that the MRI actually costs substantially more and x-rays, ultrasounds, and CT scans substantially less than the traditional system indicated. In particular, the MRI activity generates a lot of maintenance activity and sanitation activity. Managers should examine the use of these two activities to search for ways to reduce the activity consumption and ultimately its cost.